In 2017, the (ERC721) or Ethereum Request for Comments 721 has been released as a cryptocurrency standard for non-exchangeable tokens. With that standard, NFTs would be much easier to implement. Not long after, the technology has caught on with CryptoKitties, a virtual game with a blockchain foundation. But it wasn’t until 2021 that this technology went viral.
Currently, the ecosystem of non-tradable tokens is vast, varied and constantly growing. Dozens of companies are finding novel uses for NFTs, such as domain names, virtual worlds, decentralized finance (DeFi), art markets, encrypted museum arts, NFTs for collections of physical items, and much more.
Some see the new technology as something that is fashionable, a speculative bubble that will soon burst.
Now, here’s our complete guide to NFTs to help you out.
A Guide to NFTs
If something is interchangeable it means that it is not unique, it is just a commodity. Money bills are interchangeable, two bills of the same value are exactly the same and serve the same purpose. Apples are interchangeable, a box of cornflakes is interchangeable, a video game too.
In the meantime, if you transform your video game into art, by painting or drawing on it – as you’ve probably already seen online – then it becomes ‘untradeable’. In the same way, a ticket to the cinema is not interchangeable, since it is directed to a specific movie at a specific time.
Imagine the Mona Lisa painting. You can take a photo and hang it on the wall, but it will not have the same value as the original found in the Louvre. Like other original works, Mona Lisa is ‘not interchangeable’ and therefore unique.
In that way, NFT is a unique, collectible token that is permanently tied to digital art, music, collectibles, and even real estate. It is like a digital certificate that cannot be separated; the token is the art or item and represents something real.
NFTs allow us to ‘tokenize’ a myriad of things, like the ones we mentioned earlier: art, music, real estate, and more. Each of those items associated with a token can only have one owner at a time and are secured by a blockchain (most based on the Ethereum blockchain, but others like TRON and NEO also support NFTs) – no one can modify the registry of property or copy/paste a new NFT.
Ethereum has made a comparison between an NFT Internet and the Internet that we know today:
The NFT Internet:
- NFTs are digitally unique, two NFTs will never be the same.
- Every NFT must have an owner and that is public record and easy for anyone to verify.
- NFTs are compatible with everything that is built using Ethereum.
- You can trade a NFT on any Ethereum market, for a completely different NFT. You could exchange a work of art for a ticket.
- Content creators have the ability to sell their work and have access to a global marketplace.
- Creators can keep ownership rights to their own works, and claim resale royalties directly.
- Items can be used in surprising ways. For example, you can use artwork as collateral on a loan.
The Internet today:
A copy of a file, such as an mp3 or .jpg is the same as the original.
Ownership records for digital items are stored on institution-controlled servers – you have to be content with their word.
A business that sells digital items must focus on building its own infrastructure. That is one of the reasons why they usually invest large sums of money. For example, an application that issues digital tickets for events would have to create its own ticket exchange.
Creators trust the infrastructure and distribution of the platform they use, which is usually subject to conditions of use and geographical restrictions.
Platforms, such as music streaming services, keep most of the proceeds from sales. This is what it means to mint NFTs.
Different from cryptocurrencies, NFTs are not exchangeable with equivalence, since each of them is behind a specific art or article. They are cryptographic assets on the blockchain with unique identification codes and metadata that differentiate them from each other.
Because they are based on the blockchain, NFTs can be used to eliminate intermediaries and connect artists with their audience or for identity management. NFTs can eliminate intermediaries, simplify transactions and create new markets.
When you acquire an NFT, typically using cryptocurrencies, you acquire the unique token and the art attached to that token. That transaction is registered in the blockchain and offers a permanent and transparent record of that purchase and proof of ownership. And what do you do with an NFT? You can display the digital art associated with it on your computer or television and even on a digital frame. You could also resell it. Couldn’t other people just take a screenshot or replay online and claim they have a copy? Yes, but the blockchain would still teach that you are the owner of the original.
Transferring ownership of an NFT requires a blockchain transaction that can only be authorized by a private key of the NFT owner, very similar to sending Bitcoin or any other cryptocurrency.
How NFTs Work
NFTs have some special features:
- Each minted token has a unique identification.
- They are not directly 1: 1 interchangeable. For instance, a single ETH is not always the same as another token on the ERC20 technical standard. That is not the case with NFTs.
- Each token has an owner and it’s incredibly easy to identify that information.
- They are stored in Ethereum and can be bought and sold in any Ethereum-based marketplace.
- In other words, if you are the owner of an NFT:
- It’s very easy to prove that you are actually the owner of one.
- It is impossible to manipulate the token.
- You can sell your NFT, and in some cases the author of the work will earn a percentage of royalties.
- You can also decide to keep it forever without any worry whatsoever.
- And if you are the creator of an NFT:
- You can easily prove that you are the creator.
- You are the one who determines how ‘weird’ the work will be. That is, you can determine how many replicas can be distributed.
- You can earn royalties every time the work is sold.
You can sell it in any NFT or ‘peer-to-peer’ market. You are not imprisoned on any platform and you do not need any intermediary.
The world of NFT is relatively new, the scope of the NFT is all that is unique and needs demonstrable ownership. Here you will find some examples of NFTs that currently exist to help you better understand them:
- Unique art projects
- A unique sneaker in a limited fashion line
- All game elements
- An essay
- Digital collections
- Domain names
- An access ticket to an event or a voucher
The NFT evolution landscape
Why invest large amounts of money in NFTs?
It is certainly a strange idea to think about. When something is digital, the original file and a copy of it are apparently identical. However, for some people there is something special about the original file that makes it unique.
It may seem like these people are putting an imaginary value on it, but it’s not that different from the Mona Lisa example. Fundamentally, the Mona Lisa painting and a copy of it are the same images; but at some point, characteristics were imposed on the original that gives it value. Before you do, it’s important to evaluate the NFT market data as well. This will give you a better idea about when to mint NFTs, and more importantly, how much returns you can generate.
With the NFT the idea is the same. But while you may not be convinced of them yet, there may be more tangible benefits to owning NFTs down the road.
NFT’s total transaction value has increased 300 percent to $ 250 million last year, according to a recent report. OpenSea, a market for NFTs, reported selling $ 86.3 million worth of NFTs, down from $ 8 million in January. That’s because January has also been an excellent month for sales. Monthly sales were around $ 1.5 million last year.
What for some may be a speculative bubble about to burst, for others it is an opportunity to value digital art. They point to a central fact of the internet: in a digital medium where objects can be infinitely copied-and-pasted, copied and reproduced, no one cares to pay for the original. For example, songs taken from CDs and uploaded online for mp3 downloads are the reason why musicians receive less and less for their work. But with NFT, a JPEG can be as unique as an oil painting.
If you are still unsure about putting money into NFTs, it might be a wise idea to start with lower amounts. There’s no reason to put in large sums of money right from the get-go; take it slow. There’s no reason to purchase a NFT worth a thousand dollars right from the start.
Start by buying smaller NFTs (there are quite a few cheap options available), and then build your way up. With time, you will understand quite a bit about the process, and will also identify the major names in the market! We hope this guide to NFTs was helpful!